SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1996
--------------------------------------------------
Commission file number 0-11254
----------------------------------------------------------
COPYTELE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2622630
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
900 Walt Whitman Road
Huntington Station, NY 11746
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(516) 549-5900
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing reqirements for the past 90 days.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of shares of common stock, par value
$.01 per share, outstanding as of
September 6, 1996: 56,873,156 shares
-----------------
<PAGE>
TABLE OF CONTENTS
-----------------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Balance Sheets (Unaudited) as of July 31,
1996 and October 31, 1995
Condensed Statements of Operations (Unaudited) for the nine months
ended July 31, 1996 and July 31, 1995, and for the period from
November 5, 1982 (Inception) through July 31, 1996
Condensed Statements of Operations (Unaudited) for the three months
ended July 31, 1996 and July 31, 1995
Condensed Statement of Shareholders' Equity (Unaudited) for the
period from November 5, 1982 (Inception) through July 31, 1996
Condensed Statements of Cash Flows (Unaudited) for the nine months
ended July 31, 1996 and July 31, 1995, and for the period from
November 5, 1982 (Inception) through July 31, 1996
Condensed Statements of Cash Flows (Unaudited) for the three months
ended July 31, 1996 and July 31, 1995
Notes to Condensed Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
Item 6. Exhibits and Reports on Form 8-K.
Signatures.
<PAGE>
Part I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
- ------- ---------------------
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED BALANCE SHEETS (UNAUDITED)
------------------------------------
July 31, October 31,
1996 1995
----------- ----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash (including cash equivalents and interest bearing
accounts of $21,205,895 and $8,786,210, respectively) $ 21,444,593 $ 8,864,293
Accrued interest receivable 36,543 36,206
Prepaid expenses and other current assets 63,584 52,451
------------- ------------
21,544,720 8,952,950
PROPERTY AND EQUIPMENT (net of accumulated depreciation
and amortization of $773,880 and $690,420, respectively) 533,322 235,201
INVESTMENT IN JOINT VENTURE COMPANY (Note 2) 1,116,638 349,687
OTHER ASSETS 174,507 157,560
DEFERRED TAX BENEFITS (net of valuation allowance of
$23,428,000 and $15,983,000, respectively) - -
------------- ------------
$ 23,369,187 $ 9,695,398
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 667,014 $ 218,954
Accrued liabilities 54,583 39,736
------------- ------------
721,597 258,690
------------- ------------
SHAREHOLDERS' EQUITY:
Preferred stock, par value $100 per share; authorized
500,000 shares; no shares outstanding - -
Common stock, par value $.01 per share; authorized
120,000,000 shares; outstanding 56,813,156 and
25,955,103 shares, respectively 568,132 259,551
Additional paid-in capital 48,840,445 32,492,127
Accumulated (deficit) during development stage ( 26,760,987 ) ( 23,314,970 )
------------- ------------
22,647,590 9,436,708
------------- ------------
$ 23,369,187 $ 9,695,398
============= ============
</TABLE>
The accompanying notes to condensed financial statements are
an integral part of these balance sheets.
1
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------------------------
For the nine months For the period from
ended July 31, November 5, 1982
------------------------------------ (inception) through
1996 1995 July 31, 1996
--------------- --------------- ----------------
<S> <C> <C> <C>
SALES $ - $ - $ -
--------------- --------------- ---------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES,
including research and development expenses
of approximately $2,450,000, $1,513,000 and
$19,335,000, respectively 3,901,799 2,314,749 29,882,241
--------------- --------------- ---------------
INTEREST INCOME 455,782 239,808 3,121,254
--------------- --------------- ---------------
NET (LOSS) ( $ 3,446,017 ) ( $ 2,074,941 ) ( $ 26,760,987 )
=============== =============== ===============
NET (LOSS) PER SHARE OF COMMON STOCK ($0.06) ($0.04) ($0.60)
=============== =============== ===============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 54,024,087 50,145,208 44,839,159
=============== =============== ===============
</TABLE>
The accompanying notes to condensed financial statements are
an integral part of these statements.
2
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------------------------
For the three months
ended July 31,
----------------------------------------
1996 1995
---------------- ---------------
<S> <C> <C>
SALES $ - $ -
---------------- ---------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES,
including research and development expenses
of approximately $989,000 and $553,000, respectively 1,698,258 835,420
---------------- ---------------
INTEREST INCOME 218,866 91,066
---------------- ---------------
NET (LOSS) ( $ 1,479,392 ) ( $ 744,354 )
================ ===============
NET (LOSS) PER SHARE OF COMMON STOCK ($.03) ($.01)
================ ===============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 56,289,270 50,758,630
================ ===============
</TABLE>
The accompanying notes to condensed financial statements are an
integral part of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
-------------------------------------------
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH JULY 31, 1996 (UNAUDITED)
----------------------------------------------------------------------------------
Accumulated
(Deficit)
Common Stock Additional During
------------------------------ Paid-in Development
Shares Par Value Capital Stage
------------- --------------- ------------- -----------------
<S> <C> <C> <C> <C>
BALANCE, November 5, 1982 (inception) - $ - $ - $ -
Sale of common stock, at par, to incorporators on
November 8, 1982 1,470,000 14,700 - -
Sale of common stock, at $.10 per share, primarily to
officers and employees from November 9, 1982 to
November 30, 1982 390,000 3,900 35,100 -
Sale of common stock, at $2 per share, in private
offering from January 24, 1983 to March 28, 1983 250,000 2,500 497,500 -
Sale of common stock, at $10 per share, in public
offering on October 6, 1983, net of underwriting
discounts of $1 per share 690,000 6,900 6,203,100 -
Sale of 60,000 warrants to representative of under-
writers, at $.001 each, in conjunction with public
offering - - 60 -
Costs incurred in conjunction with private
and public offerings - - ( 362,030 ) -
Common stock issued, at $12 per share, upon
exercise of 57,200 warrants from February 5, 1985
to October 16, 1985, net of registration costs 57,200 572 630,845 -
Proceeds from sales of common stock by individuals
from January 29, 1985 to October 4, 1985 under
agreements with the Company, net of costs incurred
by the Company - - 298,745 -
Restatement as of October 31, 1985 for three-for-one
stock split 5,714,400 57,144 ( 57,144 ) -
Common stock issued, at $4 per share, upon exercise
of 2,800 warrants in December 1985 8,400 84 33,516 -
Sale of common stock, at market, to officers on
January 9, 1987 and April 22, 1987 and to members
of their immediate families on July 28, 1987 67,350 674 861,726 -
Restatement as of July 31, 1987 for five-for-four stock
split 2,161,735 21,617 ( 21,617 ) -
Fractional share payments in conjunction with
five-for-four stock split - - ( 1,345 ) -
Sale of common stock, at market, to members of
officers' immediate families from September 10,
1987 to December 4, 1990 and to officers on
October 29, 1987 and February 26, 1989 628,040 6,280 6,124,031 -
Sale of common stock, at market, to senior level
personnel on February 26, 1989 29,850 299 499,689 -
Continued
4
<PAGE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
-------------------------------------------
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH JULY 31, 1996 (UNAUDITED)
----------------------------------------------------------------------------------
Continued
---------
Accumulated
(Deficit)
Common Stock Additional During
------------------------------ Paid-in Development
Shares Par Value Capital Stage
------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
Sale of common stock, at market, to unrelated party on
February 26, 1989 amended on March 10, 1989 35,820 358 599,627 -
Restatement as of January 31, 1991 for two-for-one
stock split 11,502,795 115,028 ( 115,028 ) -
Sale of common stock, at market, to members of
officers' immediate families from April 26, 1991
to October 27, 1992 261,453 2,615 2,788,311 -
Restatement as of June 17, 1996 for two-for-one
stock split 28,382,183 283,822 ( 283,822 ) -
Common stock issued upon exercise of warrants by
members of officers' immediate families on
various dates from September 1993 through
July 1996 618,590 6,186 2,877,372 -
Common stock issued upon exercise of stock options
from December 16, 1992 to July 18, 1996
under stock option plans, net of registration costs 4,545,340 45,453 28,231,809 -
Accumulated (deficit) during development stage - - - ( 26,760,987 )
------------- --------------- --------------- -----------------
BALANCE, July 31, 1996 56,813,156 $ 568,132 $ 48,840,445 ( $ 26,760,987 )
============= =============== =============== =================
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of this statement.
5
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
For the nine For the
months ended period from
July 31, November 5, 1982
------------------------------------- (inception) through
1996 1995 July 31, 1996
-------------- -------------- -------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and
consultants ( $ 3,493,258 ) ( $ 2,213,524 ) ( $ 28,712,148 )
Interest received 455,445 244,944 3,084,712
-------------- -------------- --------------
Net cash (used in) operating activities ( 3,037,813 ) ( 1,968,580 ) ( 25,627,436 )
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equip-
ment ( 181,286 ) ( 33,907 ) ( 1,111,548 )
Disbursements to acquire certificates of
deposit and corporate notes and bonds - - ( 12,075,191 )
Proceeds from maturities of investments - - 12,075,191
Investment made in Joint Venture Company ( 857,500 ) ( 367,500 ) ( 1,225,000 )
-------------- -------------- --------------
Net cash (used in) investing activities ( 1,038,786 ) ( 401,407 ) ( 2,336,548 )
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock and
warrants, net of underwriting discounts
of $690,000 related to initial public
offering in October 1983 - - 17,647,369
Proceeds from exercise of stock options and
warrants, net of registration disbursements 16,656,899 4,845,236 31,825,838
Proceeds from sales of common stock by
individuals under agreements with the
Company, net of disbursements made by
the Company - - 298,745
Disbursements made in conjunction with
sales of stock - - ( 362,030 )
Fractional share payments in conjunction
with stock split - - ( 1,345 )
-------------- -------------- --------------
Net cash provided by financing activities 16,656,899 4,845,236 49,408,577
-------------- -------------- --------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 12,580,300 2,475,249 21,444,593
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 8,864,293 6,244,801 -
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 21,444,593 $ 8,720,050 $ 21,444,593
============== ============== ==============
Continued
6
<PAGE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
Continued
---------
For the nine For the
months ended Period from
July 31, November 5, 1982
------------------------------------- (inception) through
1996 1995 July 31, 1996
-------------- -------------- ----------------------
<S> <C> <C> <C>
RECONCILIATION OF NET (LOSS) TO NET CASH
(USED IN) OPERATING ACTIVITIES:
Net (loss) ( $ 3,446,017 ) ( $ 2,074,941 ) ( $ 26,760,987 )
Pro-rata share of Joint Venture Company
losses 90,549 - 108,362
Depreciation and amortization 83,460 45,567 778,521
(Increase) Decrease in accrued interest
receivable ( 337 ) 5,136 ( 36,543 )
(Increase) Decrease in prepaid expenses
and other current assets ( 11,133 ) 26,849 ( 63,584 )
(Increase) Decrease in other assets ( 16,947 ) 4,768 ( 174,507 )
Increase in accounts payable and accrued
liabilities related to operating activities 262,612 24,041 521,302
-------------- -------------- --------------
Net cash (used in) operating activities ( $ 3,037,813 ) ( $ 1,968,580 ) ( $ 25,627,436 )
============== ============== ==============
</TABLE>
The accompanying notes to condensed financial statements are
an integral part of these statements.
7
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
For the three
months ended
July 31,
---------------------------------
1996 1995
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants ( $ 1,513,631 ) ( $ 872,917 )
Interest received 191,816 96,434
------------ -----------
Net cash (used in) operating activities ( 1,321,815 ) ( 776,483 )
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment ( 28,901 ) ( 18,711 )
Investment made in joint venture subsidiary ( 367,500 ) ( 367,500 )
------------ -----------
Net cash (used in) investing activities ( 396,401 ) ( 386,211 )
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants,
net of registration disbursements 9,254,228 3,007,126
------------ -----------
Net cash provided by financing activities 9,254,228 3,007,126
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,536,012 1,844,432
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,908,581 6,875,618
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,444,593 $8,720,050
============ ===========
RECONCILIATION OF NET (LOSS) TO NET CASH (USED IN)
OPERATING ACTIVITIES:
Net (loss) ( $ 1,479,392 ) ( $ 744,354 )
Pro-rata share of Joint Venture Company losses 62,153 -
Depreciation and amortization 37,089 15,439
(Increase) Decrease in accrued interest receivable ( 27,050 ) 5,368
(Increase) Decrease in prepaid expenses ( 13,404 ) 16,893
(Increase) Decrease in other assets ( 53,326 ) 9,741
Increase (Decrease) in accounts payable and accrued
liabilities related to operating activities 152,115 ( 79,570 )
------------ -----------
Net cash (used in) operating activities ( $ 1,321,815 ) ( $ 776,483 )
============ ===========
</TABLE>
The accompanying notes to condensed financial statements are
an integral part of these statements.
8
<PAGE>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
JULY 31, 1996 (UNAUDITED)
-------------------------
(1) Summary of significant accounting policies and
other disclosures:
------------------
During 1995 the Company entered into a joint venture located in Shanghai, China
with Shanghai Electronic Components Corp. ("SECC") and Shanghai International
Trade and Investment Developing Corp. ("SIT") having a 20 year duration. The
joint venture, Shanghai CopyTele Electronics Co., Ltd. ("Shanghai CopyTele" or
"Joint Venture"), was formed with the Company owning a 55% interest in capital
and profits. The remaining interest is 35% owned by SECC, and 10% owned by SIT
(See Note 2, Investment in Joint Venture). The Company, pursuant to a Technology
License Agreement, has licensed its flat panel application technology to the
Joint Venture for exclusive use in China. It is contemplated that the Joint
Venture, in conjunction with the Company and SECC, will develop, manufacture and
market products worldwide in the telecommunications field. Reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further discussion involving the Joint Venture. On April 17,
1996, the Company and SECC signed a Letter of Intent with respect to a second
joint venture which would manufacture and sell electronic components and parts
used in Shanghai CopyTele's products and in products of other manufacturers (the
"Second Joint Venture", and together with the Joint Venture, the "Joint
Ventures").
The Company is producing production-ready prototypes of the MAGICOM product, a
multi-functional telecommunications product, that is directed toward the higher
end of its potential market. The MAGICOM product is a unique telephone based
multi-functional telecommunications product incorporating the Company's flat
panel and associated proprietary hardware and software technology. The Company
believes that the features of the MAGICOM product will position the product for
the needs of the developing digital information field and various on-line
services.
Reference is made to the October 31, 1995 audited financial statements and notes
thereto included in the Company's Annual
9
<PAGE>
Report on Form 10-K for the fiscal year ended October 31, 1995, for more
extensive disclosures than contained in these condensed financial statements.
The Company, which controls four of the seven votes of Shanghai CopyTele's board
of directors, has reflected its investment in the Joint Venture under the equity
method of accounting in the accompanying condensed financial statements. Under
certain circumstances, decisions involving the Joint Venture require either a
unanimous or two-thirds vote of Shanghai CopyTele's board of directors.
The information contained herein for the nine and three month periods ended July
31, 1996 and 1995 and for the period from November 5, 1982 (inception) through
July 31, 1996 is unaudited, but in the opinion of the Company, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation of the results of operations for such periods have been
included. The results of operations for interim periods may not necessarily
reflect the annual operations of the Company.
The Company invests principally in short term highly liquid financial
instruments with maturities of less than three months, which have been
classified as cash equivalents in the accompanying condensed balance sheets. The
cost of these investments approximates market value.
The Company has not yet determined how Statement of Financial Accounting
Standard ("SFAS") No. 123, Accounting for Stock Based Compensation will be
implemented and, accordingly, has not yet determined what impact it will have on
the Company's financial statements. This statement will be adopted by the
Company no later than fiscal 1997. The Company has adopted all other recently
issued accounting standards which have a material impact on its condensed
financial statements.
(2) Investment in Joint Venture:
----------------------------
The Company has contributed $1,225,000 in cash and technology which has been
valued for purposes of the Joint Venture at $700,000. The Joint Venture does not
reflect the $700,000 in technology as an asset or equity investment in the
condensed financial statements presented below. SECC and SIT have contributed
cash aggregating $1,575,000. The Company has reflected its investment in the
Joint Venture under the equity method of accounting (See Note 1, Summary of
significant accounting policies and other disclosures) and will recognize losses
on the Joint Venture to the extent of its cash investment.
10
<PAGE>
Condensed financial information for Shanghai CopyTele at July 31, 1996 and for
the nine month period ended July 31, 1996:
Condensed Balance Sheet
-----------------------
(Unaudited)
Cash $1,215,709
Other Current Assets 24,330
Land occupancy rights 308,760
Fixed assets, net, and
construction in
progress 658,418
Restricted Cash 433,502
----------
Total Assets $2,640,719
==========
Accrued Expenses 37,741
Capital 2,602,978
----------
Total Liabilities
and Capital $2,640,719
==========
Condensed Statement of Operations
---------------------------------
(Unaudited)
Net sales $ -
Operating (loss) ( 179,016)
Interest Income 14,381
---------
Net (Loss) ($164,635)
=========
(3) Stock option plans:
-------------------
Information regarding the Company's stock option plan, adopted by the Board of
Directors on April 1, 1987 (the "1987 Plan"), from October 31, 1995 to July 31,
1996, after adjustments for the two-for-one stock split declared in May 1996, is
as follows:
Range of Option
Shares Price Per Share
------ ---------------
Shares under option at
October 31, 1995 1,768,120 $2.09 - $ 6.94
Exercised ( 973,760) $2.09 - $ 6.38
---------
Shares under option at
July 31, 1996 794,360 $2.47 - $ 6.94
======== ==============
11
<PAGE>
The exercise price with respect to each option granted under the 1987 Plan from
its inception was equal to at least the fair market value of the underlying
common stock of the Company (the "Common Stock") on the date of grant. As of
July 31, 1996, all of the options to purchase shares of Common Stock granted and
outstanding under the 1987 Plan were exercisable. Upon the approval of the
CopyTele, Inc. 1993 Stock Option Plan (the "1993 Plan") by the Company's
shareholders in July 1993, which had been adopted by the Company's Board of
Directors on April 28, 1993, the 1987 Plan was terminated with respect to the
grant of future options. The 1993 Plan was amended as of May 3, 1995 and May 10,
1996 to, among other things, increase the number of shares of the Company's
Common Stock available for issuance pursuant to grants thereunder from 6 million
to 20 million, as adjusted for the two-for-one stock split declared in May 1996.
Information regarding the 1993 Plan from October 31, 1995 to July 31, 1996 after
adjustments for the two-for-one stock split declared in May 1996, is as follows:
Range of Option
Shares Price Per Share
------ ---------------
Shares under option
at October 31, 1995 8,893,200 $ 2.44 - $ 8.50
Granted 3,620,000 $ 4.75 - $ 8.00
Exercised (3,613,840) $ 2.44 - $ 6.38
---------
Shares under option
at July 31, 1996 8,899,360 $ 2.81 - $ 8.50
========= ===============
The exercise price with respect to each option granted under the 1993 Plan from
its inception was equal to at least the fair market value of the underlying
Common Stock on the date of grant. As of July 31, 1996, 5,929,360 of the options
to purchase shares of Common Stock granted and outstanding under the 1993 Plan
were exercisable. At that date, 6,788,000 options were available for future
grants under the 1993 Plan.
From August 1, 1996 through September 6, 1996, the Company received proceeds
aggregating approximately $198,750 relating to the exercise of options to
purchase 60,000 shares of Common Stock pursuant to the 1993 Plan.
As of September 6, 1996, 5,969,360 of the 8,839,360 options to
12
<PAGE>
purchase shares of Common Stock granted and outstanding under the 1993 Plan were
exercisable.
(4) Warrants to purchase common stock:
----------------------------------
Information from October 31, 1995 to July 31, 1996 regarding warrants previously
issued by the Company, primarily to members of the immediate families of its
Chairman of the Board and its President in conjunction with the sale of its
Common Stock, after adjustments for anti-dilutive provisions and the two-for-one
stock split declared in May 1996, is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
------ ---------------
Shares covered by
warrants at
October 31, 1995 852,666 $ 3.90
Warrants exercised (315,350) $ 2.40
Warrants expired ( 53,200) $ 1.88
-------
Shares covered by
warrants at
July 31, 1996 484,116 $ 5.07
======= ======
The exercise price of each warrant was equal to at least the fair market value
of the underlying Common Stock on the date of issuance of such warrant. As of
July 31, 1996, all of the warrants to purchase shares of Common Stock issued and
outstanding were exercisable.
(5) Stock Split:
------------
On May 24, 1996 the Company declared a two-for-one stock split, effected in the
form of a 100% stock dividend, payable on June 17, 1996 to shareholders of
record as of June 4, 1996. The weighted average number of shares outstanding and
net loss per share amounts in the accompanying financial statements have been
restated to reflect the stock split.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations.
------------------------------------
The Company, which is a development stage enterprise, was incorporated on
November 5, 1982 and has had no revenues to support its operations since its
inception. The Company's principal activities are the development of products,
further enhancements of its flat panel and its interest in Shanghai CopyTele,
the Company's 55% owned joint venture in Shanghai, China, which is accounted for
under the equity method of accounting (See Notes 1 and 2 to the Company's
condensed financial statements). There is no assurance, and the Company is not
able to predict, if and when marketable telecommunications products
incorporating the Company's flat panel technology will be produced or sold in
commercial quantities. Even if the Company were to produce marketable products,
directly or through the Joint Venture, there is no assurance that the Company
will generate revenues in the future, will have sufficient revenues to generate
profit or that other products will not be produced by other companies that will
render the products of the Company or the Joint Venture obsolete.
In reviewing Management's Discussion and Analysis of Financial Condition and
Results of Operations, reference is made to the Company's Condensed Financial
Statements and the notes thereto.
Except for the historical information contained herein, the matters discussed in
this Quarterly Report on Form 10-Q are forward-looking statements relating to
future events which involve certain risks and uncertainties, including those
identified herein and in the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1995 (the "1995 10-K"). See "Business" and Note 1 to the
Company's Financial Statements contained in the 1995 10-K for discussions
regarding uncertainties that may significantly affect the results of operations,
future liquidity and capital resources.
Results of Operations
- ---------------------
Selling, general and administrative expenses for the nine and three month
periods ended July 31, 1996 and 1995 and for the period from November 5, 1982
(inception) through July 31, 1996 were approximately $3,902,000, $2,315,000,
$1,698,000, $835,000 and $29,882,000, respectively. These amounts include
research, development and tooling costs of approximately $2,450,000, $1,513,000,
$989,000, $553,000 and $19,335,000, respectively, as well as normal operating
expenses. The increase in selling, general and administrative expenses during
the nine and three months ended July 31, 1996 as compared to the same periods
ended in 1995 resulted primarily
14
<PAGE>
from increases in expenditures for engineering supplies and services
necessitated by the present phase of the Company's development program and
related activities. Professional fees increased during the fiscal 1996 periods,
especially patent application preparation and filing fees. Other increases in
professional fees were offset by a decrease in legal fees not related to
patents. Initial marketing costs were incurred during the fiscal 1996 periods as
a result of the opening and staffing of a marketing office, retention of public
relations and advertising firms and the initial production of advertising
materials. Other expense categories such as compensation and related cost, rent
and travel expenditures also increased during the fiscal 1996 periods. The
Company has added personnel in marketing and engineering and increased the size
of its facilities during the fiscal 1996 periods. The nine and three month
periods ended July 31, 1996 also include the Company's portion of the Joint
Venture loss.
Since November 1985, the Company's Chairman of the Board and its President have
waived salary and related pension benefits for an undetermined period of time.
Four other individuals, including a former officer and senior level personnel,
waived salary and related pension benefits from January 1987 through December
1990. Commencing in January 1991, these four individuals waived such rights for
an undetermined period of time and they did not receive salary or related
pension benefits through December 1992. The Company's Chairman of the Board, its
President and the three senior level personnel (exclusive of the former officer)
continued to waive such rights commencing in January 1993 for an undetermined
period of time. One additional senior level employee also is currently waiving
such salary and benefit rights for an undetermined period of time.
The increase in interest income during both the nine and three months ended July
31, 1996 as compared to the same periods ended in 1995 primarily resulted from
an increase in funds available for investment offset, to a lesser extent, by
slightly lower interest rates. Funds available for investment during the nine
and three month periods ended July 31, 1996 and 1995, on a monthly weighted
average basis, were approximately $14,640,000, $6,650,000, $21,380,000 and
$7,766,000, respectively. The investment instruments selected by the Company are
principally money market accounts, treasury bills and commercial paper.
The Company has not yet determined how Statement of Financial Accounting
Standard ("SFAS") No. 123, Accounting for Stock Based Compensation will be
---------------------------------------
implemented and, accordingly has not yet determined what impact it will have on
the Company's financial statements. This statement will be adopted by the
Company no later than fiscal 1997. The Company has adopted all
15
<PAGE>
other recently issued accounting standards which have a material impact on its
condensed financial statements.
Liquidity and Capital Resources
- -------------------------------
Since its inception, the Company has met its liquidity and capital expenditure
needs primarily from the proceeds of the sales of Common Stock in its initial
public offering, in private placements, upon exercise of warrants issued in
connection with the private placements and public offering, and upon exercise of
stock options pursuant to the 1987 Plan and the 1993 Plan.
From November 1, 1995 to July 31, 1996, the Company received proceeds
aggregating approximately $15,901,000 relating to the exercise of options to
purchase 4,587,600 shares of Common Stock under the 1987 and 1993 Plans. In
addition, from August 1, 1996 to September 6, 1996, the Company received
proceeds aggregating approximately $198,750 relating to the exercise of options
to purchase 60,000 shares of Common Stock under the 1993 Plan.
The Joint Venture contemplates an initial investment of $7,000,000, of which
half is expected to be borrowed from banks, and capital investment of
$3,500,000. The Company has contributed $1,225,000 in cash and SECC and SIT have
contributed $1,575,000 in cash to the Joint Venture (See Notes 1 and 2 to the
Company's condensed financial statements). The Joint Venture may require
capitalization of up to $25 million, depending upon the nature and extent of its
business activities.
As stipulated in the letter of intent signed with SECC, the Second Joint Venture
is expected to have an initial capitalization of approximately $2,000,000, of
which half would consist of bank borrowings. The Company would invest cash of
approximately $550,000 and SECC would contribute cash, equipment and technology
collectively valued at $450,000. The Second Joint Venture may require an
ultimate capitalization of up to $10 million depending on the nature and extent
of its business activities, which if necessary, is expected to be financed
through a combination of bank borrowings and equity investments contributed by
the parties in proportion to their equity interests and on terms to be agreed
upon. It is anticipated that a joint venture agreement and receipt of all
necessary governmental approvals can be completed by the end of 1996.
The Company believes that even without sales it will have sufficient funds
through fiscal 1999 to maintain its present level of development efforts and to
make its anticipated capital contribution of $550,000 to the Second Joint
Venture.
16
<PAGE>
The Company's estimated funding capacity indicated above assumes, although there
is no assurance, that the waiver of salary and pension benefits by the Chairman
of the Board, the President and senior level personnel will continue. The
Company anticipates that it may require additional funds in order to participate
in the Joint Ventures following its initial capital contributions and to
continue its research and development activities.
The National Association of Securities Dealers, Inc. ("NASD") requires that the
Company maintain a minimum of $4,000,000 of net tangible assets to maintain its
NASDAQ - NMS listing. The Company anticipates that it will seek additional
sources of funding, when necessary, in order to satisfy the NASD requirements.
The Company currently has no plans with respect to additional financing. There
can be no assurance that adequate funds will be available to the Company or the
Joint Ventures, including any future capital contribution, if any (beyond its
inital capital contributions of $1,225,000 to the Joint Venture and the
anticipated capital contribution of $550,000 to the Second Joint Venture) and
its NASD funding requirements, or that, if available, the Company or the Joint
Ventures will be able to obtain such funds on favorable terms and conditions.
17
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
At the Company's Annual Meeting of Shareholders held on July 24, 1996,
five directors were elected, an amendment to the CopyTele, Inc. 1993 Stock
Option Plan was approved and the selection of Arthur Andersen LLP,
independent public accountants, to audit the financial statements of the
Company for the fiscal year ending October 31, 1996 was ratified. The
following is a tabulation of the voting with respect to the foregoing
matters:
(a) Election of directors -
Nominee For Withheld
------- --- --------
Denis A. Krusos 45,935,980 486,520
Frank J. DiSanto 45,938,280 484,220
John R. Shonnard 45,796,480 626,020
John E. Gillies 45,799,120 623,380
Gerald J. Bentivegna 45,940,120 482,380
(b) Approval of Amendment to the CopyTele, Inc. 1993
Stock Option Plan -
For Against Abstain Broker Nonvotes
--- ------- ------- ---------------
23,815,714 4,145,286 382,735 18,078,765
(c) Ratification of selection of Arthur Andersen LLP -
For Against Abstain
--- ------- -------
44,203,402 1,697,535 527,563
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed for the Company during the quarter
ended July 31, 1996.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CopyTele, Inc.
DENIS A. KRUSOS
---------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
and Director (Principal
September 13, 1996 Executive Officer)
FRANK J. DISANTO
----------------
Frank J. DiSanto
September 13, 1996 President and Director
GERALD J. BENTIVEGNA
--------------------
Gerald J. Bentivegna
Vice President - Finance and
Chief Financial Officer and
Director (Principal Financial
September 13, 1996 and Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
27 - Financial Data Schedule
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial
information extracted from the financial
statements contained in the body of the
accompanying Form 10-Q and is qualified in its
entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> JUL-31-1996
<CASH> 21,444,593
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,544,720
<PP&E> 1,307,202
<DEPRECIATION> 773,880
<TOTAL-ASSETS> 23,369,187
<CURRENT-LIABILITIES> 721,597
<BONDS> 0
0
0
<COMMON> 568,132
<OTHER-SE> 22,079,458
<TOTAL-LIABILITY-AND-EQUITY> 23,369,187
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 3,901,799
<OTHER-EXPENSES> (455,782)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,446,017)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,446,017)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,446,017)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> 0
</TABLE>
